Sinking fund: It is a resource to achieve a variety of goals
A SINKING FUND Is a fund that has money set aside to repay a debt, or for expenses that sometimes you just can’t avoid. Generally governments and companies tend to have money set aside almost like an emergency fund and labelled as a sinking fund. Similarly if anything this is one thing which we can learn from these entities to implement in our own personal financial journey.
The individual or a company will have to pay that debt in the future and that sinking fund will relieve the strain of paying such a large sum of money. Maybe even think of it like how you would an insurance plan.
The individual collects money every month/year and places it in that fund to pay that debt, before the stipulated due date. This helps to save money and avoids disbursing a large amount of money on the due date of the debt. This fund saves the interest cost of a debt and prevents an individual or company from experiencing serious financial difficulties.
Reasons to create a sinking fund
Even if you do not have a high income, you should also create a SINKING FUND. Although this type of fund is generally created to pay off debts, it can also be used for other goals.
- PLANNED EXPENSES: college tuition, memberships, insurance of all kinds, plastic surgery, Christmas gifts, birthdays, weddings, graduations, etc.
- DEBTS: mortgages, credit cards, finishing your car payment.
- MAJOR PURCHASES: renovate the whole house, organize a wedding, vacation to a luxury destination.
Having a sinking fund is a good idea to reserve your money for important goals without having to take money from your emergency fund.
Good organization, the key to building up a sinking fund
Once you have chosen the goal you want to achieve, you must know exactly how much money you need. Then divide that amount into different monthly or weekly or smaller more manageable installments. You can also take into account the date you want to make your purchase, or pay off your debt. It may happen that the amount you want to reach is variable, in that case add 10% to the approximate amount.
Designate An Account
It is best to create or designate one of your bank accounts exclusively for your sinking fund. This way you do not touch that money and meet the goal you set for yourself. The best thing you can do is to automate this process so that your money goes directly to the fund and you do not have to intervene in this procedure. For that you should join an automatic bank transfer program from your main account.
The idea of creating a sinking fund – depends solely on you and your own discipline to achieve your financial goals. Whatever your goal is, the most important thing is that you manage to save money, no matter the amount.
If you can stay disciplined over time you will achieve more goals than you think. Maybe even enlist the help of a trusted qualified advisor or someone who keeps you in line.